Fear of more rate hikes has bond dealers worried
Expectations of rate hikes to continue and heavy government borrowing in the first half is likely to push yields up further beyond 8.5% by July.
By ET Bureau |
MUMBAI: The Reserve Bank of India’s hawkish stance has put bond dealers on the edge, on expectations that rate hikes would continue given the over-supply of bonds due to the government’s front-loaded borrowing programme.
Expectations of rate hikes to continue and heavy government borrowing in the first half, which ensures over-supply of bonds, is likely to push yields up further beyond 8.5% by July.
Though the yields on 10-year benchmark government bonds closed at 8.30% from 8.40% on Wednesday, markets expect the climb in yields to continue. Yields on 10-year bonds climbed to 8.48% on May 30. The yield on 10-year government bond on June 30, 2010, was 7.55%.
“While pressure on rate hikes has abated for the time being, the pressure from government borrowing will continue from next week. While market yields have quickly corrected downward to the policy, especially since it was as per expectations, it will gradually inch upwards to the continuous supply of treasury bills and bonds in the coming months,” said B Prasanna, MD and CEO, I-sec Primary Dealership.
The government has so far borrowed Rs 143,000 crore through issuances of government bonds, treasury bills and cash management bills. Net borrowing for all of 2011-12 is pegged at Rs 3.43 lakh crore.
“While the policy has been hawkish, the bond market has not reacted aggressively. But I think, it’s too good to last. The tone of RBI’s policy continues to remain hawkish. I think the central bank could raise rates by another 75 basis points by the end of the year. The yields on the 10-year benchmark government security should hover around 8.45-8.55% till July,” said Pradeep Madhav, MD, STCI Primary Dealership.
The fact that a slowdown in economy is not one of the banking regulator’s prime concerns right now has also added to a perception that rates are unlikely to lower in the near-to-medium term.
“RBI has also rightly underplayed the domestic growth concerns. The central bank is trying to achieve a soft landing and is unlikely to alter its stance at the first hint of a slowdown. However, any adverse global market developments could lead to a temporary pause in the rate hike cycle,” said Prasanna.
Expectations of rate hikes to continue and heavy government borrowing in the first half, which ensures over-supply of bonds, is likely to push yields up further beyond 8.5% by July.
Though the yields on 10-year benchmark government bonds closed at 8.30% from 8.40% on Wednesday, markets expect the climb in yields to continue. Yields on 10-year bonds climbed to 8.48% on May 30. The yield on 10-year government bond on June 30, 2010, was 7.55%.
“While pressure on rate hikes has abated for the time being, the pressure from government borrowing will continue from next week. While market yields have quickly corrected downward to the policy, especially since it was as per expectations, it will gradually inch upwards to the continuous supply of treasury bills and bonds in the coming months,” said B Prasanna, MD and CEO, I-sec Primary Dealership.
The government has so far borrowed Rs 143,000 crore through issuances of government bonds, treasury bills and cash management bills. Net borrowing for all of 2011-12 is pegged at Rs 3.43 lakh crore.
“While the policy has been hawkish, the bond market has not reacted aggressively. But I think, it’s too good to last. The tone of RBI’s policy continues to remain hawkish. I think the central bank could raise rates by another 75 basis points by the end of the year. The yields on the 10-year benchmark government security should hover around 8.45-8.55% till July,” said Pradeep Madhav, MD, STCI Primary Dealership.
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The fact that a slowdown in economy is not one of the banking regulator’s prime concerns right now has also added to a perception that rates are unlikely to lower in the near-to-medium term.
“RBI has also rightly underplayed the domestic growth concerns. The central bank is trying to achieve a soft landing and is unlikely to alter its stance at the first hint of a slowdown. However, any adverse global market developments could lead to a temporary pause in the rate hike cycle,” said Prasanna.
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